Crash and Burn

November 18, 2008

Normally, the Pearl River Delta, a manufacturing hub in southern China, whirs with the sound of commerce. Alongside massive new highways, clusters of factories churn out toys, electronics, and other consumer products for the world; in Pearl River cities like Guangzhou, nouveau riche businesspeople cut deals at swank hotels.

But in recent months, the Delta has started to seem more like Allentown, circa 1980s. As the global financial crisis hits Western consumers’ wallets, orders for the Delta’s products have dried up. And angry factory workers, many owed back pay, have taken to the streets. In one recent incident, some 300 suppliers and creditors “descended on the River Dragon complex [a factory where the owners vanished] looting warehouses in the hopes of salvaging something,” As USA Todayreported.

This unrest is likely to spiral. As the Chinese economy sours for the first time in years, the government this week announced a $586 billion stimulus package. But in some ways, much more is at stake: While, in the U.S., a financial failure would simply mean another dent in George W. Bush’s reputation, in China it could mean the breakdown of the entire political order.

For years, the Beijing regime has stayed in power using a basic bargain with its citizens: Tolerate our authoritarian rule and we’ll make you rich. And for years, this seemed to work, leading many China-watchers (myself included) to conclude that Beijing was rising into great-power status. But as the financial crisis shows, that bargain rests on weak foundations. And if Beijing breaks its end of the deal, its people, already holding rising numbers of protests, may well break theirs.

Despite its reputation, Beijing’s autocracy is anything but absolute. The government long ago abandoned real communist ideology, and its current leader, Hu Jintao, a cipher with a background as a rural bureaucrat, has about as much revolutionary charisma as Bob Dole. And while China’s security apparatus is sophisticated, the country is too large, with too many educated, Internet-savvy people, for Beijing to brainwash its citizens the way Kim Jong-il has in North Korea. Most urban Chinese I’ve met are knowledgeable about their leaders’ strengths and flaws, and certainly don’t see them as some kind of gods, the way Mao was viewed in the 1950s and 1960s.

So, since the late 1970s, when China’s leaders began opening its economy, they have placed their bets on their ability to deliver continued economic growth. “At the time of the Tiananmen protests in 1989”--a time of economic downturn--“China’s urban educated populace had good reason to be angry,” notes China expert Jonathan Unger, in a study of China’s middle class. “Their salaries were low, and sour jokes circulated about private barbers earning more with their razors than hospital surgeons with their scalpels.” But as China’s economy has grown at explosive rates in recent years, he writes, “there has been a deliberate government policy to favor [this urban population] through their pay slips and perks.” China’s leaders channeled foreign investment to the urban east coast, created social welfare policies that favored the cities, and, for years, prevented rural people from migrating to the cities, thus keeping the job market open for young urbanites. Deng Xiaoping himself, the author of China’s economic reforms, made clear the strategy of favoring the middle class and making growth equal stability. “Let some people get rich first,” Deng famously declared.

For the most part, their gamble succeeded. For three decades, China has posted annual growth rates of over 10 percent, and this nominally communist country now seems more capitalist than Wall Street. Even in small provincial cities like Lanzhou, where I visited last year, massive malls, open-air markets, and new skyscrapers dot the downtown.

Since the 1989 Tiananmen crackdown, China’s urban middle classes have bought into this growth--and the regime. In one Pew poll, over 80 percent of Chinese said they were satisfied with conditions in their country, almost three times the percentage of Americans who were satisfied with conditions in the U.S. (To be sure, this figure relied primarily on surveys from urban, eastern China, where satisfaction is higher than in poorer, rural areas.) Indeed, when I have interviewed young Chinese professionals in cities like Shanghai, I’ve found little interest in political change. “There’s no point in talking about [politics] or getting involved,” one yuppie Chinese told Time magazine for an article entitled “China’s Me Generation” last year.

Now, that bargain is breaking down. Exports constitute nearly 40 percent of China’s GDP--far too high a figure. (By comparison, in the U.S., exports account for about 10 percent of GDP most years.) And the global financial slowdown is already taking a terrible toll. Some 10,000 factories in southern China’s Pearl River Delta area had closed by the summer of 2008. Gordon Chang, a leading China analyst, estimates that 20,000 more will shutter by the end of this year. In the third quarter of 2008, Beijing also reported its fifth consecutive quarterly drop in growth, and several private research firms expect a sharper slowdown next year. Additionally, unemployment is skyrocketing; in Wenzhou, one of the main exporting cities, about 20 percent of workers have lost their jobs, Reuters recently reported.

As growth slows, the banking sector could be hit, and the stock markets, driven by retail investors who know little about markets, could fall even farther; already, the Shanghai stock market has dropped from 6,000 points to just over 1,800 in the past year. (A drop of that size on Wall Street would put the U.S. in a second Great Depression.) With the state still holding major stakes in financial institutions, too, no one has any real idea of the scope of Chinese banks’ non-performing loans, though most estimates believe the country has some $1 trillion in bad loans.

As the economy turns sour, protest is rising. Many young Chinese have never even lived through an economic downturn. In the Pearl River Delta, months of layoffs are sparking street protests by blue-collar workers fearing they’ll never see back pay owed to them and creditors furious at factory owners who shut their doors and vanish. These demonstrations are turning violent, and ultimately could provoke a violent response, since Chinese factory owners increasingly hire thugs to hit back at demonstrators. Overall, demonstrations are spreading, according to Radio Free Asia, which closely follows the Pearl River Delta. Though China has in recent years weathered thousands of protests, they tended to be clustered in poor, rural areas, not the prosperous Delta or other middle-class regions of the country.

Even worse for the regime, the economic downturn is hitting Chinese home prices and urban jobs, too. Those urban middle classes, the key base of support for Beijing, now find their only asset, their first home, is collapsing in value, while their sons and daughters cannot find jobs right out of college. In several major cities, home prices have dropped by more than 50 percent in just the past year. Perhaps unsurprisingly, urban middle class protests over land prices and land evictions are rising in cities like Shanghai too. “These types of protests, with urban people, this is what the government is really worried about,” one longtime real estate expert told me in Shanghai. “These are bankers, doctors, professors, people with real clout.”

For the first time since 1989, Beijing seems scared. The massive stimulus package, a bold move by a government known for taking very cautious actions, is a key sign of worry. (According to the Economist, the government raced forward with this rescue in the face of a deteriorating economy, even before it had a clear plan for how the money would be spent.) To forestall protest--just in the past month there have been dozens of labor protests, according to the Washington Post--China’s national and local governments are also starting to hand out emergency payments in the Pearl River Delta and other places of unrest, where factory owners are closing up shop without handing out owed wages.

Beijing can afford a $580 billion stimulus package because it has nearly $2 trillion in reserves. But for all its cash, China’s actions may not be enough. A redux of Beijing’s 1989 Tiananmen crackdown is not a good option: Two decades ago, the number of educated protestors was far smaller, and China had less interest in protecting its global reputation. At the same time, China has granted enough freedoms that average Chinese now demand wages, fair housing, and other rights. So, unless Beijing can get its economy going again, they are likely to face the first sustained wave of protests in decades. Thus far, China has kept the labor protests separate from one another, preventing them from developing a common theme or a common leader. But if China’s downturn turns into an outright recession, the country could face its first serious threat to the regime.